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a company has two bonds outstanding. the first mature after five years and has a coupon...

a company has two bonds outstanding. the first mature after five years and has a coupon rate of 8.25%. the second matures after 10 years and has a coupon rate of 8.25%. Interest rates are currently 10 percent. what is the present price of each $1000 bond?

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Expert Solution

Bond-1:

Par Value of the bond = $1,000

Coupon rate = 8.25%

Therefore, annual coupon = 1000*8.25% =$82.50

Years to maturity = 5 years

YTM on bond (Current Interest Rate) = 10%

Price of the bond = Present value of coupons discounted at YTM + Present value of redemption value discounted at YTM

= 82.50*PVIFA(10%,5) + 1000*PVIF(10%,5)

= 82.50*3.7098 + 1,000*0.6209

= 306.0585 + 620.90

= $926.96

Note:-

PVIFA(10%,5) = 3.7098

PVIF(10%,5) = 0.6209

Bond-2:

Par Value of the bond = $1,000

Coupon rate = 8.25%

Therefore, annual coupon = 1000*8.25% =$82.50

Years to maturity = 10 years

YTM on bond (Current Interest Rate) = 10%

Price of the bond = Present value of coupons discounted at YTM + Present value of redemption value discounted at YTM

= 82.5*PVIFA(10%,10) + 1000*PVIF(10%,10)

= 82.5*6.1446 + 1,000*0.3855

= 506.9295 + 385.5

= $892.43

Note:-

PVIFA(10%,10) = 6.1446

PVIF(10%,10) = 0.3855

jeff jeffy answered 12 hours ago

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